Tuesday, January 22, 2008

Quick, Stash that Emergency Fund

The Fed just made a surprise cut on its short-term interest rate by 0.75%. This will likely bring about inflation as well, and I want my emergency fund to keep up with the inflation, at least.

This also means that Savings and CD interest rates will shortly fall at least by that amount too. How soon? Who knows. But when they do fall, they will certainly fall behind the inflation rate. According to inflationdata.com, the inflation rate in Dec 2007 is 4.08%. Meanwhile, the average 6-month CD rate is 4.66% (4.75% APY) according to bankaholic.org. Fed's cut will likely bring that to under 4%.

60% of my emergency fund is already in CD. 40% was laying around in savings accounts. To keep up with inflation, I need to consolidate them to fixed-rate CD accounts immediately. I don't think there will be enough time to shop around for good deals on CDs and transferring the money there in time before the rate adjusts. I just have to settle for whatever CD rates my current banks offer.

Lucky for me, I've been preparing for this for a while. Back in November, I've setup accounts in ING and E-Trade. I've been banking exclusively with HSBC. My primary account was there. Yet, HSBC had this outdated and slow online account opening mechanism that required you to mail/fax in documents and took weeks (days if you were lucky) to open. With ING and E-Trade, the account opening and funding procedure takes 5 minutes to complete (with ING, it took only 10 seconds!).

I did that and now I have 40% of the emergency funds that was laying around in savings accounts locked away in a 6 months 4.35% APY CD. They were in savings accounts because I had a trip to Las Vegas last December, and preferred to have them in liquid form while I was away. So, when the CD that was holding them matured last November, I simply transferred it to the savings account.

Unfortunately, the other 60% is in a CD that will mature next week. I am pretty certain that by then the rates would have adjusted. I don't know yet where I'm going to put that.

I think I'm going to ladder it. Having my CDs maturing at short intervals from each other exposes me more to bad CD rates. During uncertain economy periods, like we are in now, the bad CD rate may not keep up with the inflation rate.

About Me

I am an early 30 years old software developer working in financial industry. I live and work in a Virginia suburb within Washington DC metro area with my wife, who is a corporate CPA. We journey through the world of personal finance together. I do the steering, and my wife do the managing.
Our interest in PF started in 2001 when our net-worth was $30K in credit card debt. We had to learn and apply fiscal discipline, have a strong determination and be willing to eschew instant gratification to dig our way out of the debt.
We have come a long way since, but we do not forget what we have learned and are eager to learn much more.